AAON, Inc. — 2019 Form 10-K Summary
Business context and reporting period
AAON engineers and manufactures commercial and industrial heating, ventilation and air-conditioning equipment, including rooftop units, chillers, air handlers, heat pumps, coils and controls. This annual report covers the fiscal year ended December 31, 2019; fourth-quarter results are also presented.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $469.3 million | $433.9 million |
| Gross profit / margin | $119.4 million / 25.4% | $103.5 million / 23.9% |
| Operating income | $67.0 million | $55.4 million |
| Net income | $53.7 million | $42.3 million |
| Diluted EPS | $1.02 | $0.80 |
| Cash from operations | $97.9 million | $54.9 million |
| Capital expenditures | $37.2 million | $37.3 million |
Sales increased 8.2% and total units sold rose 4.6%. Cash, cash equivalents and restricted cash totaled $44.4 million at year-end; working capital was $131.5 million. No borrowings were outstanding on the $30 million revolving facility, with $28.3 million available after a standby letter of credit. Total assets were $371.4 million and stockholders’ equity was $290.1 million. The balance sheet included a $6.3 million New Markets Tax Credit obligation. The effective tax rate was 19.9%, versus 23.7% in 2018.
Material changes versus the prior comparable period
- Revenue growth reflected realization of earlier price increases and higher parts and water-source heat pump sales; those product categories increased by $7.0 million and $10.8 million, respectively.
- Gross margin improved 1.5 percentage points, with management citing lower average raw-material costs and improving labor and overhead efficiency. Warranty expense declined to $8.0 million from $8.8 million, while stock-based compensation expense increased to $6.7 million from $4.7 million.
- Water-source heat pump units sold increased to 7,716 from 5,334, while rooftop units declined to 14,448 from 15,273.
- Fourth-quarter 2019 sales were $122.6 million and net income was $17.3 million, compared with $112.3 million and $13.0 million, respectively, in fourth-quarter 2018.
Outlook, risks and unusual items
- Management estimated 2020 capital expenditures of approximately $73.2 million, including manufacturing capacity and facility projects. It said cash generation, cash balances and available credit were expected to meet foreseeable liquidity needs; no specific earnings or revenue guidance was provided.
- Backlog was approximately $129.2 million as of February 1, 2020, down from $147.0 million a year earlier. Management described 2019 new construction demand as unpredictable and uneven; orders are generally targeted for fulfillment within 60–90 days and may be cancellable subject to charges.
- A material weakness was identified in accounting controls for share-based compensation for retirement-eligible employees and directors. Prior financial statements and quarterly results were corrected. Management said the errors were not quantitatively material to prior periods, but corrected them due to their qualitative nature and duration. The company and its auditor concluded internal control over financial reporting was ineffective as of year-end; the auditor issued an adverse internal-control opinion but an unqualified opinion on the financial statements. Remediation was underway and not yet complete.
- Other key risks include economic and construction-market cyclicality, dependence on one customer (Texas AirSystems, about 10% of sales), commodity and component costs, competition, warranty exposure, cybersecurity, regulation and operational disruption. The New Markets Tax Credit arrangement carries potential indemnification exposure if compliance requirements are breached; management did not anticipate credit recapture. Management considered pending litigation unlikely to have a material effect.
Important facts for investors to verify
- Review the corrected annual and quarterly financial statements, particularly the share-based compensation corrections and their tax and profit-sharing effects.
- Monitor remediation and testing of controls related to retirement-eligible award accounting, given the material weakness and adverse internal-control opinion.
- Assess whether backlog conversion, customer concentration and new-construction demand support continued sales growth.
- Track the planned $73.2 million of 2020 capital spending, its funding and expected returns, along with Longview expansion progress.
- Check compliance with New Markets Tax Credit terms and monitor warranty accruals, raw-material costs and operating efficiency.